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Inflation: Will Biden reverse Trump’s China tariffs?

Last Week in the City provides a round-up of market movements and the global investing outlook. This covers the week to 8th July 2022.

| 11 min read

Oil giant Shell upgraded its medium and long-term energy price forecasts, allowing it to reverse much of a previous multi-billion-dollar write-down of the value of its assets. This rise in long-term oil-price assumptions underscores the importance of getting currently elevated inflation under control. An under-pressure Joe Biden is expected to announce that he is rolling back some of the Trump-era tariffs on Chinese goods to help ease price pressures in the US economy. Being ‘tough on China’ is one of the few of Donald Trump’s policies embraced by President Biden – and it has continued bi-partisan and public support. It may be a controversial, but necessary, move.

Boris Johnson resigned as leader of the Conservative Party after more than 50 ministers quit, forcing his hand following months of negative press. Reports suggested that plans for quickly replacing Mr Johnson will be signed off at a meeting of the party’s 1922 committee of backbench MPs on Monday and a new prime minister will be in office by September. Mr Johnson wants to stay on as caretaker prime minister, but objections have been made and the situation is still developing. The news had a negligible impact on markets.

Over the week, the blue-chip FTSE 100 index was 0.4% by mid-session on Friday, with the more UK-focused FTSE 250 up 1%.

Understand your enemies: Which is the bigger threat – inflation or recession?

Podcasts

How high will inflation go? In our latest episode of Charles Stanley Radio, Chief Investment Commentator Garry White and Chief Global Strategist John Redwood discuss whether inflation is reaching its peak.

Ukraine conflict

Russia is reducing its gas supply to Europe and will close pipelines for maintenance later this month, prompting concerns that Vladimir Putin is trying to prevent Europe replenishing its gas reserves before the winter. Germany is currently wrestling with how it will respond this winter if Russia reduces its supply of gas. Moscow and Brussels both understand that European Union cannot do without some Russian gas this winter – and some rationing has already started in Germany.

Russia will give the state greater control over private business and workers to put the economy on a stronger war footing. This is being interpreted as a sign that Moscow is preparing for the long haul in its battle for control of Ukraine. The proposed new laws are intended specifically to support the military and meet “a short-term increased need for the repair of weapons and military equipment”.

Russia’s Interior Ministry has created a new department to help enforce martial law, according to the state-run TASS news agency. The Main Directorate of Rapid Response will coordinate ministry forces if a state of emergency or a counter-terrorism operation is declared in the country. Moscow has repeatedly said it is not planning to declare martial law in Russia following the invasion of Ukraine. Martial law would see military rule temporarily substitute civilian law, allowing civil liberties such as the right to free movement or freedom of speech to be temporarily suspended.

Oil giant Shell will reverse previous write-offs of between $3.5bn and $4.5bn this quarter after energy prices soared in the wake of western sanctions against Russia. The oil group upped its expectations of future oil and gas prices in the medium and long term “reflecting the current macroeconomic environment as well as updated energy market demand and supply fundamentals”.

Freeport LNG, one of the largest US operators of liquefied natural gas (LNG) export terminals, said damage from last week's fire at its Texas plant would keep it fully offline until September, with only partial operation through year end. Natural gas prices slumped in the US and soared in Europe on news of the extended shutdown. The facility accounts for about 20% of US LNG exports and has been a major supplier to European buyers scrambling to discover alternatives to Russian gas since its invasion of Ukraine.

Economics

The Fed released the minutes from its most recent interest-rate setting meeting and again underscored its commitment to getting inflation down. Many on the voting FOMC saw the risk of entrenched inflation and indicated that a 50 or a 75 basis-point hike at the July meeting was most likely. The Fed also made clear it’s ready to prioritize inflation ahead of growth. The latest US jobs report, June’s non-farm payroll, is released later on Friday and is expected to show that job creation slowed last month, which would be positive news for the Fed as runaway wage growth could embed high inflation.

Nevertheless, some economic data suggested that the US economy was performing OK. The ISM Services PMI, a survey measuring activity in the sector, declined to 55.3 in June from 55.9 in May. However, the data point came in better than the market expectation of 54.5, with any reading over 50 indicating that the services sector is expanding.

The UK labour market is also losing steam, according to the latest survey from consultant KPMG and the Recruitment & Employment Confederation trade organisation. Employers slowed their hiring through recruitment agencies again in June, with vacancies rising at the weakest rate in more than a year. The slowdown is due to rising economic uncertainty, spiralling costs, and a shortage of candidates, the UK Report on Jobs said.

The dollar continued to rise against most of its peers.

Reports suggested US President Joe Biden was nearing a decision on whether to lift some of Donald Trump’s tariffs on Chinese goods to help tackle inflation. Some advisers, including the US Trade Representative Katherine Tai, are believed to want to leave them in place because China hasn't lived up to its commitments, particularly on the purchase of agricultural products. Treasury Secretary Janet Yellen and Commerce Secretary Gina Raimondo are believed to be in favour of lifting some of the 25% tariffs on some goods to ease price pressures in the US economy.

The dollar continued to rise against most of its peers. The euro slumped to its lowest level since 2002 on concern that the European Central Bank may be unable to raise rates as much as expected, leaving the currency exposed to interest-rate differentials.

UK gas prices hit a three-month high on Tuesday after Norwegian pipeline operator Equinor said supplies to the UK could be shut off this weekend if a pay dispute escalated. The group was forced to shut three oil and gas fields after workers went on strike.

UK house prices hit a fresh record in June, according to Halifax, despite expectations the rising cost of living in the UK would dampen demand. The average price of a UK home reached £294,845 after rising by 1.8% – the steepest monthly increase since 2007. The mortgage lender said a lack of available homes for sale was lifting prices – as well as a shift towards people buying larger, detached homes. However, Halifax said it expected the rate of price growth would now slow. Housebuilder Persimmon completed a lower-than-expected number of homes in the first half as planning delays, labour shortages and supply-chain issues hit the building sector.

Electrical retailer Currys blamed the cost-of-living crisis as it issued a profit warning for the year to April 2023. “Inflation is very likely to create a headwind to consumer spending and impact sales, particularly in some of our more discretionary categories,” chief executive Alex Baldock said. Management indicated costs were being passed onto customers.

Security becomes more important than free trade when you cannot trust all the traders. The challenges facing free trade are many.

Geopolitics

The heads of MI5 and the FBI warned of the growing long-term threat posed by China to UK and American interests, in their first joint appearance. MI5 Director General Ken McCallum said the service has already "more than doubled our previously-constrained effort against Chinese activity of concern," adding it was running seven times as many investigations as in 2018. FBI Director Christopher Wray said that the Chinese government "poses the biggest long-term threat" to economic and national security, for the two countries and allies in Europe and elsewhere. The two men warned that Beijing is using “every tool” to steal western technology.

Geopolitics is getting more complex in Asia. Japan is getting closer to NATO, the US, Australia and South Korea as part of a growing Asian defence alliance. China is seeking alliances and client states wherever they can be found.

Environmental, social & governance (ESG)

National Grid unveiled proposals for a £54bn upgrade to the UK’s electricity network, connecting offshore wind farms with the main grid. This will provide capacity for the expansion of turbine installation off the coast, adding a potential 23 gigawatts of energy. The government wants 50 gigawatts of offshore wind operational by 2030, up from 10 gigawatts today. At full output, this would meet almost two-thirds of current peak electricity demand.

Travel

Boeing chief executive Dave Calhoun warned that there was a "risk" it may be forced to axe its 737 Max 10 jet because of regulatory issues. The company faces a deadline at the end of this year to secure US regulatory approval for the jet, which has been involved in two serious crashes. In an interview with Aviation Week magazine, Mr Calhoun said he still expected a favourable outcome, with Boeing remaining in discussions with the US Federal Aviation Administration and members of Congress.

Scandinavian carrier SAS obtained court approval to continue operating as normal, following its filing for US Chapter 11 protection from bankruptcy. This will allow a business and debt restructuring to occur.

IAG-owned British Airways will cut another 10,300 short-haul flights from its schedule between August and the end of October, bringing the total number of flights scrapped to 30,000. The industry has struggled with staff shortages as demand for air travel recovers after pandemic restrictions were eased. Critics accused the airline of selling seats on flights it knew it couldn’t fulfil.

Philip Meeson, the executive chairman of budget airline Jet2, said airports have been "woefully ill-prepared and poorly resourced" for the number of people wanting to fly in recent months. Mr Messon said his airline was directly affected by "inexcusable" wider disruption across the airline industry and its suppliers and customers had endured a "very much poorer experience" than they should have.

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Inflation: Will Biden reverse Trump’s China tariffs?

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